Storm sales boost gives U.S. carmakers chance to cut oversupply

DETROIT (Reuters) - The two storms that battered southeast Texas and Florida in the past month have given U.S. automakers a reprieve from two problems that have cast a shadow over the price of their shares all year: bulging new-vehicle inventory and an oversupply of nearly new, off-lease vehicles.

FILE PHOTO: Cars damaged by Hurricane Harvey wait to be processed at a local staging area run by Insurance Auto Auctions Inc, which has launched a major operation to process damaged cars for its insurance company customer base in Houston, Texas, U.S. on September 5, 2017. REUTERS/Nick Carey/File Photo

Automakers are scheduled to report U.S. sales on Oct. 3, offering the first indications of the boost to demand for vehicles to replace those damaged or destroyed in Houston’s record floods and the pummeling much of Florida got from Hurricane Irma. Analysts expect September to show the first monthly increase in vehicle sales this year.

According to data compiled for Reuters by car-shopping website CarGurus, during the height of the storm online car searches in Houston were down 25 percent - from an Aug. 4 baseline - but as of Sept. 17 were up 18 percent.

“Business has been very brisk at our 26 dealerships (in southeast Texas) this month,” said Pete DeLongchamps, vice president for manufacturer relations at Group 1 Automotive Inc, the third-largest U.S. auto dealer group. “That’s true for both new and used vehicles.”

Cox Automotive chief economist Jonathan Smoke says that the “immediate replacement demand” following the storms is around 600,000 including 400,000 in southeast Texas. Around 200,000 of the replacement vehicles will likely be new and the rest used.

Most of the cars will be used either because many people lack flood insurance, their insurers only pay them the current replacement value, or they owe more than their vehicle is worth so they will not be able to afford a new car.

“This is a great opportunity for the automakers ... as this will lead to a reduction in the excess supply that’s been on the market,” he said.

High demand around Houston has already prompted dealers in other states, automakers and their captive finance companies to shift nearly-new vehicles into that market for auction.

Forecasts that hundreds of thousands of vehicles would need to be replaced boosted shares of General Motors Co and Ford Motor Co, despite disappointing sales figures for August. GM shares are currently trading at a three-year high.

Before the storms hit, U.S. automakers were facing the largest levels of unsold inventory in 13 years, said Joe Langley, a senior analyst at economic forecasting and data company IHS Markit.

FILE PHOTO: Tow truck driver Alex Toll drops off cars damaged by Hurricane Harvey at a local staging area run by Insurance Auto Auctions Inc, which has launched a major operation to process damaged cars for its insurance company customer base in Houston, Texas, U.S. on September 5, 2017. REUTERS/Nick Carey/File Photo

IHS estimates automakers have 500,000 to 600,000 more vehicles in stock than they need. GM accounted for about half that oversupply, Langley said. GM has cut production and said earlier in September that it is on track to reduce inventories to about 850,000 vehicles at the end of the year from 938,000 as of Aug. 1.

There are concerns that competition for market share amid declining sales mean automakers will not cut production enough.

“Inventory will likely be a lingering problem because everyone wants to fight for share,” said Jessica Caldwell, executive director of industry analysis for car shopping website Edmunds.com.

FILE PHOTO: Tow truck driver Alex Toll drops off a car damaged by Hurricane Harvey at a local staging area run by Insurance Auto Auctions Inc, which has launched a major operation to process damaged cars for its insurance company customer base in Houston, Texas, U.S. on September 5, 2017. REUTERS/Nick Carey/File Photo

“ELEVATED DEMAND”

Within days of the catastrophic flooding Hurricane Harvey brought to the Houston area, an army of tow trucks began descending on the city to haul away damaged vehicles.

A spokesman for the non-profit National Insurance Crime Bureau (NICB) said that as of Wednesday around 297,000 auto insurance claims had been filed related to Harvey and 128,000 had been filed because of Irma.

Executives at Copart Inc, which dominates the auto salvage auction business alongside KAR Auction Services Inc, said last week during an earnings conference call the company could salvage more than 85,000 vehicles damaged by Harvey. KAR did not provide an estimate, but the website for its unit Insurance Auto Auctions Inc lists around 54,000 flood-damaged vehicles that have been processed so far.

Recent data points from Houston have been encouraging for auto sales.

Used vehicle prices are rising. Geoff Parker, a regional vice president at KAR’s ADESA used-car auction unit, whose territory includes Texas, said auction volumes have been up around 10 to 20 percent following Harvey and between 25 percent to 35 percent more dealers have been attending auctions.

Parker said auto dealers in Ohio, Georgia and Tennessee have been shipping used cars to Texas for sale and an automaker’s captive finance company has just shipped 1,000 off-lease vehicles from Michigan for sale in Texas.

Post-Irma sales in Florida have been slower to pick up because the storm left many dealers without power for longer.